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You don't have to be a rocket scientist to manage a mutual fund, but John Chisholm has used his degree as an MIT aerospace engineer to help pilot $1.3 billion
Acadian Emerging Markets
(ticker: AEMGX) to stellar long-term gains.

Chisholm views more than 20 emerging markets through an engineer's eyes; in his view, raw data trump emotion and meetings with management. For the past 20 years, Chisholm and his co-managers have used a quantitative model to dispassionately sift through a database of more than 6,000 securities, for several factors at the individual-stock and macro levels. He looks for "growth at a reasonable price," but incorporates a more macro screen, including trends in interest rates and currencies. Chisholm prefers countries with accommodating monetary policies, for example, because tightening could signal an overheating economy.

In both rocket science and investing, Chisholm, 50, says: "It's important to look at the world in terms of data." The quantitative approach helps "to predict security returns in a more structured way."

John Chisholm, manager of the Acadian Emerging Markets Fund, relies on his quantitative models for stock-picking.
Gary Spector for Barron's

It has worked for years. The fund has returned 11.9% every year over the past 15, outpacing 91% of its peers and the MSCI Europe, Australasia, and Far East index. That's especially impressive, given that the fund had to overcome its 2008 meltdown, when it fell 58%. It has beaten 79% of its peers in the past year and 76% over three years, according to fund-tracker Morningstar.

Concern about China's slowdown has taken the steam out of emerging markets this year, but Chisholm, who has been lead manager of the fund since 1993, is overweight Brazil, South Korea, and Turkey, where he sees encouraging economic growth and relatively cheap stock prices. China and Russia are among his underweights: China's economy is slowing more than anticipated, and monetary policy isn't very accommodative. Russia "is one of the cheapest markets," with stocks selling at five times earnings, Chisholm observes, but he expects earnings growth to be weak there, given sluggish energy prices. "We like cheap markets," Chisholm says, "but also markets with a growth story."

Chisholm says that a structured process is inherently contrarian. Acadian's valuation model analyzes typical stock metrics, such as price-to-book value, price-to-sales, and price-to-earnings. He looks for stocks selling for less than the MSCI Emerging Markets index, with strong balance sheets and a history of using capital efficiently. He favors companies growing faster than the current consensus: "Specifically, we monitor how accurate each individual analyst has been with their forecasts for earnings and earnings growth in the past, and then weigh those who have been more accurate, on average, more heavily."

Boston-based Acadian Asset Management, which Chisholm helped found in 1987 (he now is its chief investment officer), oversees $55 billion in assets, but offers only one other mutual fund, a fixed-income vehicle with a similar strategy. Under manager L. Bryan Carter, that fund,
Acadian Emerging Markets Debt
(AEMDX), has returned 15.5% over the past year, beating 94% of its peers.

Acadian got out of Argentina and Turkey in 2002 ahead of financial disasters, and Chisholm was rightly cautious on Brazil in 2010 and 2011. Today, however, he's overweight Latin America's biggest economy, seeing its stocks as attractively valued, trading at just 11 times the current earnings estimate. Besides the reasonable stock prices, he thinks earnings growth could be "decent" amid 3% gross-domestic-product expansion.

In Brazil, Chisholm likes
Companhia de Bebidas das Americas,
or Ambev. Its American depositary receipts (ABV) are up 114%% over the past three years, but down this year after the beverage giant reported tepid beer sales in Brazil for the first quarter and downgraded its earnings outlook for the year. But Chisholm thinks that recent price weakness is "the pause that refreshes," and he expects profit growth to remain "robust." The manager also sees the coming soccer World Cup and Summer Olympics, both of which will take place in Brazil, boosting beer and beverage volume.

Acadian Emerging Markets

Total Returns*

1-Yr

3-Yr

5-Yr

AEMGX

21.66%

7.88%

-2.39%

MSCI EAFE

31.95

11.09

-1.21

% of

Top-10 Holdings

Ticker

Portfolio**

Samsung Electronics

005930.Korea

5.66%

Lukoil

LKOD.UK

2.27

Bank of China Ltd

3988.Hong Kong

2.18

Fubon Fin'l Holdings

2881.Taiwan

1.66

Grupo Financiero Banorte

GFNORTEO. Mexico

1.58

China Petroleum

386.Hong Kong

1.57

Cia Bras Distr Pao Acucar

PCAR4.Brazil

1.53

Industrial and Commercial Bank of China

1398.Hong Kong

1.51

Turkiye Is Bankasi

ISCTR.Turkey

1.46

Tenaga Nacional Bhd

TNB.Malaysia

1.44

Total

20.86

*All returns are as of 5/16; three- and five-year returns are annualized. **As of 4/30. Source: Morningstar; company reports

The fund tends to be more volatile than its peers; Chisholm says its value emphasis leads to contrarian picks—for example, commodity stocks that were hard-hit during the bear market. But "our clients expect us to take risks," he adds. After the sharp drop in 2008, Chis-holm adjusted the model a bit, limiting overweighting in especially volatile stocks to no more than 1.5% of the benchmark. "We wanted to make sure we had better risk control in place," he says. "We don't want to repeat 2008." In 2009, the fund shot up 77%, slightly ahead of the emerging markets' average of 74%.

SPEAKING OF VOLATILE: With North Korea's saber-rattling, South Korea's stocks are down 6.4% this year. Chisholm sees opportunity, noting that many companies are trading at single-digit price/earnings ratios.

Samsung Electronics (005930.Korea) is the fund's largest holding, at close to 6%. Samsung recently announced smartphone sales that boosted first-quarter profits 42%. Chisholm expects it to sell 70 million units of the Galaxy 4 smartphone. The company is also launching a host of variations on the Galaxy 4; these promise to boost its share of the smartphone market beyond its industry-leading 33%. Samsung is trading for just 6.7 times its forward earnings estimate—"cheap for a growth stock," Chisholm says. Samsung shares are about flat for the year.

The fund has 6% of its assets in Turkey, which, Chisholm notes, has a "reasonably undervalued currency and a relaxed monetary policy." His top pick there is Turkiye IS Bankasi (ISCTR.Turkey), for its "slight margin improvement" and loan growth of 16% to 18% this year. "Isbank is not a traditional growth stock," he says.

But Turkey's expanding economy and the bank's growing loan business make it a good bet.